There were no changes to the headline estimate for fourth quarter GDP in the second revision. It came in at 1.9%, while the price index was revised down to 1.9% from 2.2%.

Despite the subdued growth and inflation, the Fed Funds futures are bumping up their probability of a March hike to about 50% now. There is the perception that Yellen’s Fed is worried most about surprising the markets, so in some ways, this becomes a self-fulfilling prophecy. The more the Fed Funds futures price in a hike, the more likely the Fed is to vote for one.

Home prices rose 5.8% in December, according to the Case-Shiller Home Price index. This is the fastest pace of acceleration in the past 2.5 years. Interestingly, we are starting to see correlations between the top tier and bottom tiers break down as the luxury market slows while the demand for starter homes increases. Much of that is inventory-driven, where starter homes are snapped up within a month of listing, while McMansions languish. Certainly in the Western MSAs, Chinese demand is a big factor, and that has been slowed by capital controls.

Housing demand increased 6.5% in January, according to Redfin. “Soaring stock markets, still low mortgage rates and a steady economy bolstered homebuyers at the start of 2017,” said Redfin chief economist Nela Richardson. “Homebuyers were not just window shopping, they were serious about making offers and getting to the closing table. However, this uptick in homebuyer enthusiasm won’t guarantee strong sales in the coming months. With pending home sales down across the country in January despite strong demand, the lack of supply is a formidable foe for buyers this year.”

The trade deficit widened to $69.2 billion in January from $64.4 billion in December. Exports fell 0.2% while imports rose 2.3%. The US dollar is playing a big part here, but I suspect this number will begin to take on more importance going forward, especially with respect to threats of protectionism, which will flow through to growth and ultimately interest rates.

In other economic news, business activity strengthened in February, according to the Chicago PMI Index. Consumer confidence rose in February and stands at a 15 year high, according to the Conference Board. Finally, the Richmond Fed Manufacturing Index improved.

Donald Trump will address Congress tonight, and lay out his vision for his administration going forward. Expect to see a call for increased defense spending, while cuts in discretionary spending to offset it, along with stepped up growth assumptions. Administration officials are signaling that the speech will be a Reaganesque “Morning in America” speech of optimism and economic growth. Those looking for details on his plans should probably not expect much in the way of clarity. The speech will probably not be market-moving unless it goes really badly, in which case you should expect a flight to safety, with lower stock prices and lower interest rates. Here are the sectors to watch: financials, retailers, healthcare.

Freddie Mac has put out its Outlook for the housing market and origination. They forecast a 27% drop in originations as the refi business goes away, with the 30 year fixed rate mortgage to average 4.4%. Their baseline prediction anticipates some fiscal stimulus out of DC, which should send inflationary expectations somewhat higher, but not cause a major increase. The second most likely scenario would be heavier fiscal stimulus, which would cause higher inflation, with higher interest rates, higher home price inflation, and lower origination numbers. The least likely scenario is a retrenchment of inflation (basically the Japan scenario).

Stocks are lower this morning on overseas weakness. Bonds and MBS are up small.

We have a slew of economic data this week with the second revision to Q4 GDP, Personal Income and Spending, Construction Spending, and the ISM data. Even though this Friday is the first of March, the jobs report will be released on the 10th. Finally, we get some Fed-speak this week, culminating with Janet Yellen on Friday, which will begin the quiet period ahead of the March FOMC meeting.

Durable Goods orders rose 1.8% MOM but are down 0.6% YOY. Capital Goods expenditures fell 0.4% MOM and are up 0.5% YOY. Capital Goods orders are a proxy for business investment (and therefore the animal spirits), so for all the talk about improved sentiment businesses are still in maintenance mode, not growth mode.

Pending Home Sales fell 2.8% in January as tight inventory reduced sales. Lawrence Yun, NAR chief economist, says home shoppers in January faced numerous obstacles in their quest to buy a home. “The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay,” he said. “Buyer traffic is easily outpacing seller traffic in several metro areas and is why homes are selling at a much faster rate than a year ago 1. Most notably in the West, it’s not uncommon to see a home come off the market within a month.”

Donald Trump’s proposed budget includes increased defense spending, a cut to agency budgets, and no changes to Social Security and Medicare. This is just an opening bid, and Congress will ultimately determine who gets what. Separately, Trump signed an executive order taking aim at excessive regulations.

Jeffrey Gundlach, CEO of Double Line Capital sees the 10 year heading to a range of 2% – 2.25% as there is a “stealth flight to safety” happening globally and the most crowded trade on the planet (short bonds) goes the wrong way. He is supportive of Treasury’s plan to issue longer-dated bonds (30 years up to 100 years). At these rates, why not? Warren Buffet won’t touch them with a barge pole, however.

Stocks are down this morning on disappointing earnings and slumping commodity prices. Bonds and MBS are up.

Consumer sentiment flattened out in February, according to the University of Michigan consumer sentiment survey.

New home sales rose 5.5% YOY to 555,000 in January. This is 3.7% above the revised December reading. The median new home price was $312,900 and the average price was $360,900. At the end of the month, there were 265,000 new homes for sale, which represents a 5.7 month supply. You can see from the chart we are barely back to pre-1990 levels which doesn’t even take into account things like population growth and obsolescence.

Donald Trump is scheduled to speak at CPAC this morning. Shouldn’t be market-moving, but just be aware.

Bonds have been rallying a touch on a report that Donald Trump’s infrastructure plan will be moved out to 2018. The thinking is that Democrats are united in opposition at the moment (there is a lot of handwringing over handshaking), but by 2018, midterm elections will be looming and Trump could pick off some Democratic Senators up for re-election in states Trump won like Jon Tester or Claire McCaskill. Given that the Fed’s forecast of 2-3 rate hikes in 2017 was contingent on fiscal stimulus, this could ultimately push the Fed to hike only twice this year.

Morgan Stanley is out with a call saying the housing recovery is still in the “middle innings.” That is probably a fair assessment, however the building boom required to balance out supply and demand has yet to happen. As we know, the market for starter homes is extremely tight as builders focused on the luxury end of the market post-crisis and professional investors bought up small houses to turn into rentals.

Did you know that if you wanted to lend money to the German Government for two years, it would cost you almost a percent per year? In other words, you would have to pay 101.73 to get back 100 in two years. Demand for safe collateral in Europe as well as fears of the French election have pushed German 2 year yields to -95 basis points. Strange times we live in.

We are starting to see selling pressure at the ultra-high end of the real estate market as the new Chinese capital controls take effect. In an attempt to control currency outflows, the Chinese government imposed controls which limit real estate investments overseas. The most vulnerable cities are on the West Coast, particularly Seattle and San Francisco, although it should hit all of the big urban areas. Big McMansions which used to be snapped up in days now sit vacant in LA.

Stocks are flat this morning on no real news. Bonds and MBS are up small.

Initial Jobless Claims rose slightly to 344,000 last week.

Economic activity took a step back in January, according to the Chicago Fed National Activity Index. The 3 month moving average is basically just below zero, which indicates the economy is growing more or less at its historical trend.

The FOMC minutes didn’t really have much of an impact on the markets yesterday. The money quote: “In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.” On the other side of the coin, the Committee worried about downside risks to the economy due to the stronger dollar, uncertainty about US fiscal policy, and potential overseas weakness. So overall, the minutes were taken to be generally dovish, but not enough to move markets.

Despite that “fairly soon” language, the Fed funds futures didn’t really move, and are still pricing in about a 33% chance of a hike in March. Dennis Lockhart, speaking this morning, clarified that statement, saying that “fairly soon” means “in the next 3 meetings.” Incidentally, Mohammed El Arian thinks the markets are underpricing this risk and he thinks it is a 50-50 chance of a rate hike next month.

The minutes did discuss housing briefly: “Recent indicators of activity in the housing sector were generally positive. Starts and permits for single-family housing and sales of existing homes rose moderately in the fourth quarter, and real residential investment bounced back after two quarterly declines. A couple of participants commented that supply constraints might be holding back new homebuilding. In addition, a few participants noted that prospects for residential investment would also depend on whether household formation picked up and how housing market activity responded to the recent rise in mortgage interest rates.” The supply constraints alluded to probably refer to land, although skilled workers are also an issue. The rise in interest rates probably isn’t large enough to affect purchase decisions – a lack of inventory, which is driving up prices matters more. A lack of affordable starter homes is probably a big factor in the depressed household formation rate. although jobs and student loan debt are the main drivers.

We are becoming a nation of renters and landlords, as the percentage of buyers who don’t plan to live in the house rose to 37% last year. This is really just the inverse to the falling homeownership rate. These new buyers may be potential landlord, or they could be flippers. Despite Blackstone’s deal with Fannie Mae to acquire rental properties, Wall Street is generally exiting the mass rental business as it figures the easy home appreciation money has already been made.

House prices rose 1.5% in the fourth quarter, and are up 6.2% YOY according to the FHFA House Price Index. The Mountain division led the pack while the Mid-Atlantic division brought up the rear. Since bottoming out in early 2012, the index has posted a 6.2% annual growth rate.

Delinquencies fell in January, according to the Black Knight Financial Services First Look report. Total DQ rates fell to 4.25%, which is down almost 4% MOM and 16% YOY. Foreclosure starts did tick up on a MOM basis, but there is a seasonal aspect to that.

A Reuters poll of housing economists shows that they are somewhat critical of deregulation in housing. “”Moving to ease back on those regulations now, when the market is already recovering and house prices are rising, would only increase the risk of another dangerous bubble forming,” said Capital Economics property economist Matthew Pointon.” FWIW, I think that fear is overblown, I don’t see another bubble in housing as a possibility. Bubbles are rare psychological phenomena in an asset class, where both investors and bankers view an asset as “special” and dismiss the risk that it can decline in price. This causes both parties to take excessive risks – borrowers lever up too much, and bankers chase yield. Credit is still historically tight in the housing market, and the proposed changes to Dodd-Frank generally fall under small bank regulatory relief, providing better guidance such that banks can determine what regulators consider proprietary trading versus market-making, and making some changes to the CFPB. These changes won’t bring back the no-no loans or pick-a-pay loans of 2006, and won’t lead people to believe that house prices only go from the bottom left corner of the chart to the top right hand corner. To put everything in perspective, take a look at the mortgage credit availability index below. The difference between the bubble days and today couldn’t be more stark.

The analysts also are predicting a 4.4% mortgage rate by the end of the year. According to the latest MBA mortgage applications report, the average rate is 4.36%, so we are pretty much already there.

Stocks are higher this morning on no real news. Bonds and MBS are up small.

Mortgage applications fell 2% last week as purchases fell 3% and refis fell 1%. The rate on a 30 year fixed rate mortgage rose 4 basis points to 4.36%, according to the MBA.

The year got off to a strong start with existing home sales increasing at an annualized rate of 5.69 million in January, according to NAR. This is up 3.8% from a year ago, and is the strongest reading since Feb 2007. The median home price rose 7% to $228,900. Inventory is down 7% YOY and stands at 3.6 months’ worth. Days on market dropped to 50 from 64 a year ago. The first time homebuyer accounted for 33% of sales, which is inching up. Competition is strongest for homes in the low to medium price range. Fannie’s deal with Blackstone on single family rentals will probably only make the lower price points even tighter. Still, a good start for the year. If we get some regulatory relief for the smaller banks, we should see more construction for the “mom and pop” builders.

Toll Brothers reported better than expected numbers this morning, with deliveries flat in dollars but up 12% in units, contracts up 14% in dollars and 22% in units, and backlog was up 19% in dollars and 21% in units. Average selling prices fell to 773,700 from 873,500, but that was due to an acquisition, and a geographic shift to the North and East. The company raised guidance as well for 2017. The stock is up about 6% pre-open.

We have the potential for some volatility in rates this afternoon with a Fed speech at 1:00 and the FOMC minutes at 2:00 pm. Below is a chart of the current handicapping in the Fed Funds futures market. Looks like about a 30% chance of a March hike, about a 55% chance of a hike by May and a 75% chance of a hike by June. The dot plot from December is forecasting between 2 and 3 25 basis point hikes.

Donald Trump reversed Obama’s immigration enforcement policy, which will make it easier to deport people who commit crimes. Obama’s policy only deported those that were guilty of violent crimes. Trump will now include those guilty of fraud as well. The policy for “Dreamers” – those who came illegally as children – is unchanged. There are some worries that this will affect the housing market by reducing demand and making the market for construction workers even tighter. It could also tighten credit, as Dreamers are eligible for Fannie, Freddie, and FHA loans. The fear is that any sort of mass-deportation will trigger early defaults, leaving the lender on the hook for a buyback. From the look of it, the change in immigration policy is relatively minor – more for show than an actual substantive change in policy – and there are no mass deportations on the horizon.

Any sort of increase in deportations will probably make a tight labor market even tighter, which would be inflationary. That is the fear about this afternoon’s FOMC minutes. The FOMC statement from Feb 1 removed references to lower energy prices and a strong dollar, which work against inflation. Investors will also be looking to see if there was discussion around shrinking the Fed’s balance sheet. This could conceivably affect mortgage pricing, as the biggest buyer of MBS pulls away. That said, spreads didn’t do much when the Fed was aggressively buying, so the end of reinvestment probably won’t make that big of a difference either.

Fannie Mae shareholders got slammed yesterday after an appeals court rejected their bid to sue the US government over the “net sweep” dividend change. Fannie Mae stock was down 35% yesterday, while Freddie Mac was down 38%. Fannie stock has been on a wild ride since the election, rising from $1.65 to $4.50 before falling back to $2.71 yesterday. FNMA stock has always been a litigation lottery ticket, and the only reason it exists in the first place is because the government didn’t want to have to consolidate Fannie and Freddie debt on its balance sheet so it had to leave 20% outstanding. Fannie Mae’s market cap is $15.72 billion, and last year they earned $12.3 billion, which makes their P/E ratio about 1.3x. The Obama administration was adamant that FNMA shareholders should receive nothing – in their view conservatorship is tantamount to bankruptcy and in bankruptcies the common stock gets wiped out.

Stocks are up as the markets have a risk-on feel to them. Bonds and MBS are down small.

Not much in economic data, but we will have Fed-speak all day, with Kashkari, Harker, and Williams speaking.

The highlight of the week should be the FOMC minutes coming out tomorrow. Other than that, we get existing home sales, new home sales and the FHFA House Price Index.

The initial look at February manufacturing indicates a slight decline as the flash PMI falls from 55.5 to 54.3. Services came in at 53.9.

Goldman is tempering their enthusiasm for the S&P 500, warning that investors are overly optimistic. They predict the stock market will go nowhere for the rest of the year. Their concerns are that the good earnings from Q4 won’t continue, and any sort of fiscal stimulus out of Washington will take time to be felt.

Despite TRID’s best efforts, about 17% of consumers end up being surprised by the existence of closing costs when getting a mortgage. The surprises run the gamut of points, up front MI and taxes.

House Financial Services Committee Chairman Bill Huizenga (R-MI) has introduced a bill to clarify the definition of points and fees under the CFPB QM rule by excluding title charges and escrowed T&I.

We are starting to see average new home sizes decline, which is a function of the emerging first time homebuyer and the market for starter homes. After the real estate bust, the only segment of the new home market that was working was the ultra-luxury end, which meant that average home sizes increased. From 2009 to 2015, it looks like average square footage increased by close to 400 square feet. Now, as more and more starter homes and townhouses are being built, we are seeing average size decline again. Strange to think that the luxury end is the only part that works in the aftermath of a bust, but there you go.

One often overlooked advantage to buying versus renting: The fact that making your mortgage payment every month amounts to a savings plan as you pay down your principal on your loan.

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

The index of leading economic indicators rose 0.6%, stronger than expected.

Household debt increased in the fourth quarter, as growth in non-mortgage debt outpaced growth in mortgage debt. The 4th quarter saw $617 billion in newly originated mortgages, the highest level since Q32007. Auto loans and student loans saw an uptick in 90 day delinquencies, while credit cards and mortgages saw an improvement. Remember, this is only the debt side of the equation – both incomes and asset prices (especially housing) are higher than they were in 2007.

Housing affordability remains about in line with pre-crisis levels, according to the NAHB. As of the end of the year, approximately 59.9% of all homes were affordable to a borrower with the median income. You can see the big swing in affordability between the boom and bust years. Tight inventory is being offset by (still) low mortgage rates. California remains the biggest issue regarding affordability. In the San Francisco MSA, just 7.8% of the homes sold were affordable to people earning the median income of $104,700.

The median home price increased 7% in January to $261,100, according to Redfin. Home sales were up 5.6% compared to January 2016, which shows that the uptick in rates hasn’t affected the purchase market. Inventory is down 12% YOY, and listings have dropped 5.1%. 18% of homes sold above list price, and the average sales to list ratio was 93.7%. Days on market fell 7 days YOY to 59.

Despite all the missteps of the initial days of the Trump administration, stocks are partying like it is 1999. This certainly has the political class (and the business press) scratching their heads. First, while the first 100 days of the Official U.S. Airing of The Grievances may seem dramatic, it doesn’t mean much for business (except for some consumer product companies and retailers who suffer from ideologically-driven boycotts). Second, for all the talk in the business press of “uncertainty,” investors are sensing (correctly, I think) that gridlock is going to rule the day in DC. Nothing is more “certain” than gridlock, and if regulations get eased a bit, that is good for business. Gridlock also means the Fed has some room to go slower. At the end of the day, earnings drive the stock market, not the histrionics in Washington and the media.